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Thursday, October 18, 2012

Why do we Need Government to Tell Business to be Energy Efficient?

In response to my interview "The Myth of Affordable Energy," my friend and fellow blogger Gary Alexander asks a question that is so good that I would like to take a separate post to answer it.

Gary asks:

Ed, I need your clarification on a comment you made in the opening section,
in which you said that the increase in energy efficiency in the U.S. is
"pretty remarkable, considering that we haven’t really had a policy
environment that is supportive of efficiency. Think what we could do if
we did."

My question: Isn't efficiency (getting more done with
the same or less) a constant goal of most businesses? Why would these
businesses need an official federal government policy to direct this
efficiency from afar? Nearly every technology has increased efficiency
and/or lowered cost over time, in the natural course of conducting
business in a cost-conscious manner. Or am I missing something?

Excellent question.

The goal of businesses is to make a profit. Part of their strategy for doing that is to adjust their input mix to minimize the total cost of producing their product. I that sense, yes, they are constantly pursuing the goal of efficiency and the government does not need to nudge them to do so.

However, businesses have no inherent goal to economize on any one input. For example, if market prices signal that plastic is cheap and steel is expensive, an automaker will substitute plastic bumpers, door handles, and so on for steel. Vice-versa if plastic is expensive. An automaker has no inherent goal of reducing its use of steel, just reducing costs.

What we need, then, are not government policies that tell businesses to act efficiency in response to market prices. What we need are policies that safeguard the integrity of the price system itself. That is why we need policies that are consistent with the principle of full-cost pricing.

As I discussed in the interview, that means doing two things.

First, it means stopping government subsidies that make the prices of some inputs artificially low. For example, without subsidies to corn farmers and ethanol blenders, we would use less corn ethanol in our automotive fuel. According to most studies I have seen, less ethanol would mean a more efficient fuel mix.

Second, it means fixing government policies that allow businesses to take resources without paying for them. Promarket economists like my early mentor Murray Rothbard have long argued that pollution is a form of "taking" via uncompensated harm to other people and their property. That means harm to people and property owners who live downstream or downwind from a specific factory or power plant, and in the case of some pollutants, it means harms that are felt even more widely, even globally.

Look at it this way: A business owner is like a dog owner. Just as the burden of cleaning up the dog's poop is the owner's responsibility, and becomes part of the cost of owning a dog, the harm that pollution does to downwind residents and property owners is a both a moral and an economic responsibility of the businesses.

In an ideal world, the market would capture pollution costs and impose them back upon the polluter. Downwind property owners and individuals would sue under the tort concepts of nuisance and trespass. The court costs and damages would give the needed price signal to the polluter to cut back on the use of inputs that cause heavy damage in favor of cleaner ones.

But that is in an ideal world, one where streets were privately owned, one where street owners would write anti-poop clauses into the contracts they entered with dog walkers and go to court to recover damages from dog walkers who did not respect those contracts. For better or worse, we do not live in that kind of Heinleinian anarcho-capitalist utopia.

Instead, we have government streets and government imposed fines on irresponsible dog walkers. In my mind that is better than just absolving the dog owners of their responsibilities and leaving the rest of us to step in the poop.

Similarly, to safeguard the integrity of energy pricing, we can use government fines, or pollution charges, or taxes, or whatever you want to call them. So much per ton of SO2, so much per ton of carbon, whatever. Yes, in some philosophical sense, that is a second best, a less elegant solution than one that internalizes all pollution costs through voluntary contracts and the enforcement of property rights. Yes, it is hard to get the prices just right. But it is the best hope we have for making our planet cleaner, healthier, more sustainable and--importantly--more efficient.

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